Why is receivables management important to enterprises? You need cash to flow at all times to keep a company running efficiently and smoothly. By ensuring the accounts receivables are received by you on time, you ensure that you have the money needed to pay your suppliers promptly. Hence, you need to manage the accounts receivable and accounts payable efficiently.
What is receivables account?
The receivables account is also called the bills receivables and consists of transactions with people to whom one offers services or goods on a credit basis. It also comprises businesses or clients from whom the business is money owed because of the credit facilities availed for business purposes. The accounting language calls such firms, clients, parties, companies Sundry Debtors. These can consist of cash receivables, trade receivables etc., and are an asset to the firm.
What is receivable management?
The receivable management definition can be said to be the management of accounts not just for the receivables but also of the entire process of defining the policy on credit and deciding payment terms. It also consists of ensuring the timely collection of payments and dues, sending follow up letters and reminders for timely payments, which are essential areas of managing the account receivables.
The accounts receivable management process typically follows some steps listed below:
- Customer invoicing mentioning credit policy and date due.
- Recording transactions with their due dates.
- Monitoring the due through a collection and follow-up schedule.
- Generating bills that are overdue and bills due chronologically.
- Sending letters of reminder with bill details and due date.
- When payment is received, a receipt, adjustment entry and sales account are to be recorded accordingly.
- If cash discounts are allowed for early payment, a suitable adjustment entry is reflected in the accounts under the receivable account.
For example, if you have an arrangement with the supplier to pay later or avail of its credit facilities, the firm will show this transaction as money owed to your account. It will show in its accounts payable or sundry creditors section on the right side of its balance sheet. Similarly, when you supply goods or services on credit, the firm that has to pay you is a sundry debtor. Their account is shown in the accounts receivable, which when totalled forms the sundry debtors reflected on the left, asset, or debit side of the balance sheet.
Receivable management deals with accounts receivable and is hence an asset and dynamic account. It remains till the payment is made by the client or received by the creditor. Moreover, since money is still owed, the accounts receivable are an asset to the company. Thus, outstanding money and invoices that are yet to be paid by the customers are called Account Receivables. This account is also called the bills receivable account. Having understood the meaning of receivables management, let's explore its objectives, scope, and a collections management system (CMS).
What are the objectives of account receivable management?
The management of your accounts receivable is called receivables management and includes:
- Collections Management
- Payment Collections
- Accounts Receivables
To run a business successfully, cash inflows are crucial and should be kept at an optimum level. Even though receivable management appears to be a simple job, it is dependent on the nature of your business and can get very tedious. As the business grows, the management of receivables becomes a complex task. You will need good accounting software to manage your receivables which should be able to scale and match your company’s growth, needs and standards.
- It helps improve the cash flow: One of the main objectives of a good receivable management system is to ensure that the business owners are helped in keeping their cash inflow steady. The sound management process provides an exact picture of how much and when your cash is due and where it is stuck.
It also maintains the sales transactions in a systematic and chronological record in the accounts receivable account. Proper management of this account means the cash inflow will be sufficient to fund everyday transactions and make payments to your suppliers. Always ensure your credit limit with your suppliers is greater than the credit period you offer your clients.
- It keeps the bad debts to a minimum: Cash blocked in credit or overdue is a loss to a business. Lack of funds and blocked cash quickly escalates into a shortage of funds for everyday business activities and in making prompt payments to your suppliers. Companies should avoid international receivables management at the early stages as these are hard to recover.
If the receivables are poorly managed, it can lead to bad debts, default payments to the firm’s suppliers, and e ventually monetary losses and a loss in reputation and credibility. Thus, receivables management helps track and record the receivables and payments schedules, so you can take corrective action and follow an optimum credit policy wit h efficient measures of collections from your debtors.
It improves customer relationships and satisfaction: Improving your receivables management through efficient tracking of your clients lets you know those whose payment performance records are good and who are loyal to their commitments and your products. Rewarding such customers with additional price discounts, transparent transactions, added or staggered credit periods etc., can help build loyal customers and improve client retention and satisfaction.
It can boost sales volume: Efficient receivable management, as discussed above, can bring in more customers and improve your sales and thus your profitability. By offering credit facilities that are transparent and well-documented, your customer base can be improved to a sizeable extent.
Examples of accounts receivables:
- On 10th June 2021, Raj Enterprises sold goods worth Rs 50,000 to Sunil Traders on credit for 15 days.
- From the 10th of June till the time of day the bill is paid by Sunil Traders, Rs 50,000 is an account receivable in the books of Raj Enterprises against the account of Sunil Traders.
- Now assume that on the 20th of June, Sunil Traders pays Rs 30,000 to Raj Enterprises.
- This amount of Rs 30,000 is reduced from Sunil Trader’s account.
- Post the adjustment entry, the overall accounts receivable of Sunil Traders will be Rs 20,000.
Now let us see how the accounts receivables transaction is recorded.
How to record accounts receivables management in the books of account?
The above transaction is reflected as below in the journal entries of Raj Enterprises to account for it and adjust the account when the bill is paid in the books of account.
When the sale is made on credit on 10th June 2021:
Dr Sunil Traders a/c
Cr Sales a/c
When the sale bill is paid in part on 20th June 2021:
Dr Bank/Cash a/c
Cr Sunil Traders a/c
The accounts receivable are also reflected in the financial statements. Any value that is high in the accounts payable to you or receivables reflects poorly on your management of the account. For example, outstanding or overdue bills means poor financial management.
Scope of receivables management:
When you offer a sale of services or goods on credit, you need to efficiently record and track the due amounts owed to you. All such amounts due from your clients are reflected as outstanding or bills receivable.
Receivable management is critical to the health of your business and maintaining a healthy inflow of cash. Thus, the scope of the management of the receivables account in an accounting system is:
- To track and record the amounts and clients whose payments are due.
- Use the credit period thriftily.
- Try to provide closure to the long-pending bills.
- Monitor and improve customer relationships by tracking their payment performance.
Accounts receivables treatment in financial statements:
As of now, you have discovered, the meaning of receivables is the due amount that you have to yet receive from your customer within a specific period. Hence, money coming into the account is treated as a current asset. When the financial statement is drawn up, the total amounts due are reflected on the left side, debit side, or asset side of the financial statement as sundry debtors, accounts receivables, or trade receivables.
Impact and objectives of receivable management :
The importance of receivables management is linked to your flow of cash which is the bloodline of any enterprise. Efficient functioning of receivables management deals with controlling and planning of recovering the dues in the accounts receivable and ensuring a transparent, accurate record of all financial transactions in the bills receivables account. For instance, a sale is successful only when the customer buys your product and pays for it, so also it is with credit sales. However, until the payment is received, the amount due gets reflected in the bills receivable account.
Another reason why receivable management is crucial is that the accounts receivable, when reflected in a financial statement, denotes what percentage of your sales are on credit. When the figure is large, it implies inefficient handling of cash flow. It is worth noting that until the payment is received, you are paying to carry costs of the goods sold and interest on your working capital, which is offered free of interest to your clients, albeit for short periods. Hence, the health of your business is affected, and your working capital gets tied up for longer periods.
Receivables management tracking is possible from the records of the bills receivables account, which tells you how much is due, when it is due and from whom it is due. It is important to ensure timely collections of the receivables because otherwise, your cash flow is impacted. To ensure efficient management, you need to place an efficient credit management system or CMS in place.
Efficient management of accounts receivables benefits businesses in many ways. It improves the cash inflow through quicker sales realisations into cash. It is also used to build wider customer bases through credit sales and boost loyal customers' client relationships by rewarding them. An efficient Credit Management System or CMS also undertakes receivable management in financial management by automatically providing you with the entity's financial reports of accounts receivables whenever you need them. Do you know that the Khatabook app can be used for all your accounting needs, including an efficient CMS? Try the app on your phone today!